Trans-Fee Mining Bubble Finally Popped as FCoin Goes Bankrupt

FCoin paused withdrawals over a shortage of crypto assets that is worth up to $130 million.

FCoin, a controversial cryptocurrency exchange known for its “trans-fee mining” model, is facing an uncertain future. A few days after a rogue employee has allegedly destroyed about $750 million worth of its native token, founder Zhang Jian has practically declared its bankruptcy.

According to a Reddit post published by the former Huobi CTO, the Singapore-based exchange has paused trading and withdrawals over a shortage of crypto assets that amounts to around 7,000 to 13,000 BTC (worth up to $130 million). Explaining the whole story, Jian said FCoin found itself insolvent due to gross negligence, namely “a data error + a decision error.”

Although he contacted his previous employer, Huobi founder Lin Li, for help as a last resort for possible rescue solutions, it seems FCoin’s previous success wasn’t alluring enough for them to part with their cash.

Background and further details

FCoin invented the trans-fee mining model in which the transaction fees are used to reward the community. While other exchange charges trading fees, FCoin converts this fee into tokens and gives it back to the users.

This method of rewarding traders made FCoin a big success right from day one, both for the platform and its team members. The founder said that a few days after its initial launch in 2018, a single day’s dividend went as high as 6000 BTC while he personally made $150-200 million in profits.

The exchange also promised investors a share in the company’s profits, making the community members as the stakeholders. Despite the success, the TFM model was criticized as it creates a great incentive for traders to collude and participate in wash trading to increase their earnings.

FCoin distributed 80% of the platform’s revenue to the users holding the token, with gains distributed every single day. On top of this, users holding assets or making trading volume greater than a certain threshold were eligible for the VIP program offering more fee refunds.

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However, it all came to no avail. After running the platform for two years, FCoin announced that it had failed, promising to refund investors over a period of up to three years.

Due to an increased profit margin, a growing number of traders elected to use FCoin’s services, which allowed the exchange’s volumes to grow substantially, despite unusually thin order books and low traffic.

As the owner explained, the data errors “polluted” and “multiplied” dividend income. And although Zhang claimed in the post that he used his entire income to compensate for missing assets in earlier stages and even convinced other members of the team to do the same, the loss was larger than originally expected, and they found it too late.

The Reddit post further reads:

“One day later, a kind user reminded us that he received a lot of mining returns. This immediately caught our attention, began to thoroughly investigate the reasons, and frozen a small number of accounts with problematic mining data, and timely recovered some of the frequently-occurring mining. However, with the deepening of the investigation, we found a large number of existing data problems of dividends and mining returns, and these problems have existed for many days. As a result, a large number of users have already been through operations such as buying and selling various currencies and withdrawing cash, causing the “pollution” of assets. At that time, it was estimated that the loss was equivalent to 10-20 million US dollars, which is completely affordable in our body.”

Despite the bankruptcy filing, the troubled founder promised to continue to use his own money and proceeds from other projects to compensate the exchange’s creditors as much as he can. He further explains that ‘mail withdrawal’ processing will be divided into two phases; the current phase (takes 2-3 months) and the long-term phase process, which may take 1-3 years. Since the current assets are not enough to pay back all the users, he will apply the principle of allowing as many users to withdraw as possible to minimize the number of people affected.

Until then, it seems all FCoin users and token holders can do is wait.

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